Value enhancement through modernisation: introduction
Modernising a property is one of the most important levers for owners to maintain or increase the value of their property. However, not every measure leads to a corresponding value enhancement. A bathroom costing 25,000 euros does not automatically increase the property value by 25,000 euros. This article shows which modernisation measures are economically worthwhile, how to optimise costs for tax purposes and which mistakes to avoid.
Basics: How modernisation measures affect value
Market value vs. income value
The market value of a property is determined using the comparative value method, the income value method or the asset value method. For rented properties, the income value method is relevant: here, the value is determined by the achievable annual net rent (gross return) and the property interest rate. Modernisations that increase the rent lead directly to a value enhancement.
Value enhancement through rent increases
If a modernisation measure increases the rent by 1 euro per square metre and month, the income value increases by 20 euros per square metre at a multiplier of 20. For an 80 m² apartment, this corresponds to a value enhancement of 1,600 euros – significantly less than the measure cost.
Value enhancement through energy improvements
In recent years, another effect has intensified: properties with good energy efficiency achieve higher purchase prices. Improving the energy rating by one level can increase the purchase price by 3 to 5 %.
The most important modernisation measures at a glance
1. Sanitary installations (bathroom, guest WC)
A modern bathroom is one of the most important value drivers. An outdated bathroom is often the reason why an apartment cannot be rented or sold. The costs for a bathroom renovation are 10,000 to 25,000 euros, the value enhancement 5,000 to 15,000 euros. Amortisation occurs through the higher rent and faster rentability.
Tip: Use timeless materials and walk-in showers for the bathroom renovation. Accessibility is increasingly becoming a selling point.
2. Heating system replacement
Replacing an old heating system with a modern heat pump is not only ecologically sensible but also economically viable. Investment costs are 15,000 to 30,000 euros; KfW funding can be up to 40 %. The value enhancement results from lower utility costs, higher rentability and the energy standard.
3. Windows and exterior doors
Replacing windows with modern double or triple glazing reduces energy consumption and improves sound insulation. Costs are 300 to 800 euros per window; the value enhancement is lower than the costs – but the measure is a prerequisite for a heating system retrofit.
4. Electrical and network installations
Outdated electrical installations can pose a safety risk and impair rentability. Modernising the electrical installation costs 3,000 to 8,000 euros; the value enhancement is low, but the measure is often a prerequisite for other modernisations.
5. Roof and facade
Insulating the roof and facade is expensive (30,000 to 60,000 euros), but it significantly reduces energy consumption and improves the energy rating. The measure is only economically sensible if the facade needs to be renovated anyway.
6. Lift
In apartment buildings, a lift is a strong value driver, especially in areas with an older population or on upper floors. Costs are 30,000 to 60,000 euros; the value enhancement can be up to 20 % of the purchase price – particularly for ground-floor apartments that are upgraded by a lift.
Modernisation surcharge: what landlords need to know
The 8 % limit
When landlords carry out modernisation measures, they can pass the costs on to the rent – the so-called modernisation surcharge. This is limited to 8 % of the annual net rent (3 % for first-time modernisation). This means: with an annual net rent of 6,000 euros, the rent can be increased by a maximum of 480 euros per year (40 euros per month).
Advance notice
Landlords must announce the modernisation and the planned rent increase in writing three months before the start. The tenant can object to the measure if it constitutes a hardship (e.g. health reasons).
Special case: energy modernisation
Since 2021, a special hardship clause applies to energy modernisation: tenants with a household income below 40,000 euros can fend off the rent increase if it represents an unreasonable burden.
Tax aspects of modernisation
Maintenance expenditure vs. construction expenditure
- Maintenance expenditure: Measures that keep the property in proper condition are immediately deductible (e.g. repairing the heating, replacing defective windows).
- Construction expenditure: Measures that improve or extend the property beyond its original condition must be capitalised and depreciated over the useful life (e.g. building a garage extension, lift).
Depreciation (AfA)
For rented properties, straight-line depreciation applies: 2 % per year for buildings constructed after 1925, 3 % for buildings before 1925. For modernisation measures classified as construction expenditure, the partial value approach applies: the costs are allocated to the building and depreciated over the remaining useful life.
Special depreciation for residential construction
In certain funding areas (e.g. in structurally weak areas in NRW), there are special depreciations for residential construction. These can be up to 5 % per year.
Common mistakes in modernisation
1. Over-modernisation
Not every measure makes sense. A high-gloss kitchen in a simple residential area in Duisburg-Marxloh will not lead to a corresponding rent increase. Modernisation should be oriented to the standard of the neighbourhood.
2. No profitability calculation
Before every modernisation, there should be a profitability calculation: what does the measure cost, how high is the rent increase, what is the payback period? Without this calculation, modernisation is a gamble.
3. Wrong sequence
The sequence of modernisation is crucial. If you first renovate the bathroom, then replace the heating and finally insulate the facade, you may need to renovate the bathroom again because the pipes need to be adjusted. The correct sequence: first the building envelope (roof, facade, windows), then the technology (heating, ventilation), then the interior.
4. Subsidies not applied for
Many owners forgo subsidies because they shy away from the effort. This is a mistake: KfW funding can cover up to 40 % of costs. Important: the subsidy must be applied for before the start of measures.
Conclusion
Modernising a property is a central instrument for value enhancement, but it requires careful planning. The most important recommendations:
- Create a profitability calculation before every measure.
- Follow the correct sequence: building envelope, technology, interior.
- Apply for subsidies in advance.
- Orient to the neighbourhood standard, do not over-modernise.
- Calculate the modernisation surcharge correctly and announce it.
- Clarify the tax classification (maintenance vs. construction expenditure).
Those who observe these rules can sustainably increase the value of their property while simultaneously improving rentability and energy efficiency.
